1 Year Treasury Note vs. Total Bond Fund

[OldShooter]

Well, I think your question really has two pieces: A one-year question and a long-term question.

The one year question is: Measuring total return as after-tax money in your pocket, will the bond fund or the govvie have superior return over one year? My guess and I think the sense of the thread is that the govvie will probably do better. I don't see that the long-term plan for the money is a factor in your decision.

Now, after the one year, what to do? Since none of us know what the year will bring and this is a decision that you don't have to make right now, don't make it.

The long term is just a bunch of short terms strung together.

 

[pb4uski]

The beauty of an individual bond is you know what you’re going to get and when you are going to get it. With a fund, its like a box of chocolates.

Great point.

 

[COcheesehead]

In a market like this you want income with downside protection. Fund or individual bond? One is a yes the other is a maybe.

 

[RobbieB]

I buy bonds to insure myself funds to cover an equity collapse like 50%. I haven't sold any yet.

 

[RunningBum]

I don’t buy bonds for inflation protection. No one should. Bonds are not an inflation hedge. There should be other components in a portfolio to use as an inflation hedge. I look at my total return of my portfolio in relation to inflation and even with a significant amount of funds devoted to my ladder, I’ve done OK with inflation. My bonds are my retirement paycheck, steady and (almost) assured.

I wasn't talking about inflation protection. What I mean is that I don't understand why it is so important to get back your original investment when you don't know what that amount can actually buy when the bond matures.

 

[Magus]

Why not a 2 year UST bond instead of 1 year? 70 extra bps. I would avoid total bond funds with a lot of long duration maturities and instead stick with short term and intermediate bond funds if you want to go that route. Long duration bonds are far, far more at risk of rising rates than short duration.

 

[lawman]

VFIDX https://investor.vanguard.com/mutual-funds/profile/VFIDX has a 30 day yield of 3.61%. Trying to time interest rates is a fools game. I have owned this fund for 20 years or more. I don't worry about defaults which is something I would worry about if I held individual corporate bonds..Anyone want to buy some of my Enron?

 

[Freedom56]

In this environment, you should build up or add to a laddered bond portfolio of individual bonds starting with the shortest maturities. Stay away from bond funds. If you don't want to buy individual bonds, buy CDs or Treasures as yields become more attractive. Rates are going up, but with $30 Trillion in national debt and record consumer and corporate debt, there is only so far that rates can rise. This year will be another golden year for retail investors to build up a fixed income portfolio while fixed income fund managers continue to lose "other peoples money".

 

[lawman]

while fixed income fund managers continue to lose "other peoples money".

How so? Do you mean the lower share price if rates continue to rise?

 

[Freedom56]

How so? Do you mean the lower share price if rates continue to rise?

There is no preservation of capital associated with bond funds. They buy when there in inflow of cash to the fund at whatever price a bond is trading and they sell when there is an outflow of capital. Their fees are based on a percentage of the assets in the fund not performance. So for example, last year when many investment grade 3 year corporate notes were trading with a yield less than 1%, these funds were buying. Now that those yields are at about 4% and people are ditching these funds, they are selling leaving the fund holder with losses. When you buy an individual bond, you are locked in to the yield at the time of purchase and your capital is returned at par at maturity and sometimes higher when called prior to maturity. It's not too different from buying a brokered CD. With a bond fund the investor is assuming the market risk and also paying a fee to assume that risk.

 

[lawman]

There is no preservation of capital associated with bond funds. They buy when there in inflow of cash to the fund at whatever price a bond is trading and they sell when there is an outflow of capital. Their fees are based on a percentage of the assets in the fund not performance. So for example, last year when many investment grade 3 year corporate notes were trading with a yield less than 1%, these funds were buying. Now that those yields are at about 4% and people are ditching these funds, they are selling leaving the fund holder with losses. When you buy an individual bond, you are locked in to the yield at the time of purchase and your capital is returned at par at maturity and sometimes higher when called prior to maturity. It's not too different from buying a brokered CD. With a bond fund the investor is assuming the market risk and also paying a fee to assume that risk.

Not sure I fully understand but if my investment grade bond fund is yielding 3.61% and the duration is 6 years shouldn't I be able to reasonably expect to get that return if I hold for 6 years?

 

[COcheesehead]

Bond fund durations are fluid. Individual bond durations are exact.

 

[Magus]

Not sure I fully understand but if my investment grade bond fund is yielding 3.61% and the duration is 6 years shouldn't I be able to reasonably expect to get that return if I hold for 6 years?

Not necessarily due to the phenomenon he mentioned. Shorter duration bond funds the more true that would be. Bond funds are constantly buying and selling bonds which lock in real gains and losses, whereas holding individual bond funds to maturity would not. It’s possible it could still be around 3.6%. It may be better or worse. The longer the average duration the bond in the bond fund, the more likely the principal changes a lot in value. We’ve had a 40 year bond market bull market that appears to have ended so a lot of what we’ve seen for bond returns may be over for a long time, especially in real returns.

 

[lawman]

Not necessarily due to the phenomenon he mentioned. Shorter duration bond funds the more true that would be. Bond funds are constantly buying and selling bonds which lock in real gains and losses, whereas holding individual bond funds to maturity would not. It’s possible it could still be around 3.6%. It may be better or worse. The longer the average duration the bond in the bond fund, the more likely the principal changes a lot in value. We’ve had a 40 year bond market bull market that appears to have ended so a lot of what we’ve seen for bond returns may be over for a long time, especially in real returns.

So can I get individual 6 year investment grade bonds that will yield 3.61%

 

[COcheesehead]

So can I get individual 6 year investment grade bonds that will yield 3.61%

Actually likely higher.

 

[Freedom56]

Not sure I fully understand but if my investment grade bond fund is yielding 3.61% and the duration is 6 years shouldn't I be able to reasonably expect to get that return if I hold for 6 years?

If rates continue to rise, with a bond fund, you will continue to see negative returns on your capital. Your coupon payments are not guaranteed to stay constant throughout the 6 years. They can go up or down during that period. Many investment grade bond funds are in a precarious position holding AA+ rated 8-10 year corporate notes with coupons around 1-1.25% that in many cases they purchased over par but now are trading well below par as rates rise. For example consider this Apple 1.25% 2030 note. Some fool (fund) bought this note in 2020 (probably with other peoples money) above par as high as $102. Now it trades around $83 implying that funds who bought at par or over par that are now selling the same note at a big loss. Somebody is realizing that loss. As a retail investor, I would never consider buying this note even close to par and would only consider buying it if it dropped to about 60-65 cents on the dollar and it would not even surprise me if it did drop that low. When faced with massive outflows of capital from redemptions, these funds sell their lowest coupon longest duration bonds first. Retail investors like me wait for these panic moments to load up on high quality corporate notes at get inflated returns at the expense of these funds.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C925719&symbol=AAPL5030516

 

[pb4uski]

Not sure I fully understand but if my investment grade bond fund is yielding 3.61% and the duration is 6 years shouldn't I be able to reasonably expect to get that return if I hold for 6 years?

Yes, what the 6 years means in theory is if interest rates spike 1% that the fund will decline in value by 6% and it will take about 6 years for the value to recover to what it would have been without the spike in rates.

https://www.core-wm.com/2018/11/29/...when rates are rising,returns in the long run.

 

[jazz4cash]

So can I get individual 6 year investment grade bonds that will yield 3.61%

On Fidelity I see the MEDIAN yield for 5 yr investment grade bonds is 3.83. There are some decent (well known) companies in the 4-4.5 range. In fact this got me motivated to do some due diligence on an issue from Southwest Airlines, so thanks for that!

 

[LA_Newsboy]

I'd suggest I Bonds thru Treasury Direct....After May 22, they are paying 9.62%.

 

[ERhoosier]

Strong second for iBonds in these inflationary times, but understand their features.
- Interest consists of a fixed rate for bond's life (currently 0) PLUS inflation rate reset every 6 months. Interest is paid (and taxed) when the bond is cashed.

-Must be held for at least 1 year
- If held less than 5 yrs, then the last quarter's interest is lost.

- Maximum purchase $10k per year per person


For short (1-2 yr) bond holdings, I'm using Treasuries. Net yield (after income taxes & broker fees/markups) matches (sometimes exceeds) AA corporates. Treasuries can be bought with no commissions via Treasury Direct or many discount brokers. At some brokers, those fees (mark ups) on individual corporate bonds can really cut into returns for shorter term bonds (fee typically charged per bond whether it is 1 yr or 30 yr).


I gave up on bond funds years ago. Share value fluctuates so no assurance you will get back your full invested 'principle' at time certain like you would with investment grade (or Treasury) bond held to maturity.

 

[zaqxsw]

For short (1-2 yr) bond holdings, I'm using Treasuries. Net yield (after income taxes & broker fees/markups) matches (sometimes exceeds) AA corporates. Treasuries can be bought with no commissions via Treasury Direct or many discount brokers. At some brokers, those fees (mark ups) on individual corporate bonds can really cut into returns for shorter term bonds (fee typically charged per bond whether it is 1 yr or 30 yr).

When referencing buying from Treasury Direct for short 1-2 yr. bond holdings. Do you mean Notes, Bills, but probably not Bonds (they are greater than 10 yrs. to maturity)?

I already have been maxing out on I-Bonds for a couple of years.

 

[ERhoosier]

I used the term "bond holdings" generically to refer to fixed income instruments. Of course Treasury securities maturities include Bills (up to 1 yr), Notes (>1yr - 10yrs), and Bonds (20 or 30 yrs). I was specifically referencing Treasuries in that 1-2 year maturity range (bills & short-term notes).



Treasury Inflation-Protected Securities (TIPS) (5, 10, & 30yr maturities) are a bit different as their principal value fluctuates with inflation (up, or down in periods of deflation). Unlike iBonds, interest & (inflation) principle value increases are taxable each year (not deferred until you cash in the bond).



https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm


https://www.treasurydirect.gov/instit/annceresult/tipscpi/tipscpi.htm



https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_rates.htm

 

[Al in Ohio]

Would you guarantee no loss over the 1 year time period the OP is asking about?

OP's question has nothing to do with a 10 year horizon: "I am debating whether to follow what has been my normal strategy and put the money into a total bond fund (at Fidelity). Or, should I grab a 1 year treasury note at about 1.9% and wait a year or more to put the money into the bond fund?"

He explicitly is talking about holding that amount in bonds or bond fund for ten years. You’re not reading it correctly. The op just had thought an option A of putting this money in a treasury note for year one until he gets a handle on how bonds will react to inflation in the near term, then adjust for the remaining 9 years.

 

[Bergamo]

If rates continue to rise, with a bond fund, you will continue to see negative returns on your capital. Your coupon payments are not guaranteed to stay constant throughout the 6 years. They can go up or down during that period. Many investment grade bond funds are in a precarious position holding AA+ rated 8-10 year corporate notes with coupons around 1-1.25% that in many cases they purchased over par but now are trading well below par as rates rise. For example consider this Apple 1.25% 2030 note. Some fool (fund) bought this note in 2020 (probably with other peoples money) above par as high as $102. Now it trades around $83 implying that funds who bought at par or over par that are now selling the same note at a big loss. Somebody is realizing that loss. As a retail investor, I would never consider buying this note even close to par and would only consider buying it if it dropped to about 60-65 cents on the dollar and it would not even surprise me if it did drop that low. When faced with massive outflows of capital from redemptions, these funds sell their lowest coupon longest duration bonds first. Retail investors like me wait for these panic moments to load up on high quality corporate notes at get inflated returns at the expense of these funds.

https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C925719&symbol=AAPL5030516

Agreed about the serious problems with something like the Apple 2030 note in a bond fund.

It looks like rates will continue to rise so what would you suggest a retired person who is holding TBM in an IRA and IT TE in taxable should do. I agree that we are now in a different situation than the past 30 years.